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Technical Stock Investing

What does technical stock investing mean? We hear terms like technical analysis of stock and fundamental analysis. What are they and how can traders and investors use these techniques to make money buying stocks, selling shares of stock, holding stocks or trading stocks? There are basically three situations that lead to the purchase or sale of stock. First of all a person may buy stock with the intention of long term investing. Buying dividend stocks, the person may simply choose to collect quarterly payments over the years with no intent of selling stock in order to collect a capital gain on his investment. On the other hand the same person may not be happy if the stock stops paying dividends and may think of selling stock. The third situation is where someone intends to buy stock and sell stock in such as way as to profit from the fluctuations in stock price. Watching the stock market with technical analysis tools such as Candlestick analysis in order to profit from the rise and fall in stock prices is largely the province of technical stock investing.

Let us look at technical stock investing as lying somewhere in between lifetime ownership of shares of the same stock and day trading where one may only own the stock for minutes. The technical investor is looking to profit from changes in stock price but will not necessarily be sitting at the trade station scalping profits during a run up in the market. Rather a person interested in technical stock investing will be looking for stocks that are likely to rise or fall substantially in price. Whether that price jump takes the form of a gradual increase in price over six months or arrives in the form of a breakout gap one morning as the NYSE opens makes little difference. In technical stock investing the investor simply wants to get in at a low price and sell at the high price or sell short at a high price and, after a market reversal, profit from buying at the bottom of a price curve. In technical stock investing the investor will rely heavily on tools such as Candlestick chart analysis that predict changes in stock prices more so than fundamental tools that analyze for a margin of safety or intrinsic stock value. To the extent that technical stock investing does use this approach it is to identify a stock that is severely underpriced or over priced and a good candidate to follow.

In technical stock investing the investor identifies stocks which he believes are due for a change in price. He will use Candlestick patterns to identify when a historic stock price pattern is about to repeat itself. It is because market prices repeat themselves that traders and investors can let the market tell them what the market will do next. It is not so much a matter of the investor chasing a stock price as the investor letting the stock price come to him. By anticipating the market and responding through Candlestick trading tactics the investor can place limit orders and not worry about being at the trade station or on the phone with a stock broker all day.


Market Direction: The purpose for finding a trading program that works successfully is to constantly put the probabilities in your favor. Many trading programs can be eliminated as a viable trading program if you just ask the simple question, "What puts the probabilities on my side a ledger?" If the answer is not immediately apparent, there should be a serious evaluation of whether one wants to pursue that trading program. That is one question that does not have to be asked when utilizing candlestick analysis. The Japanese Rice traders developed the candlestick signals because of one simple premise. Investor sentiment reacts the same way in the same circumstances time after time.

Candlestick analysis acts as a two-sided sword. It reveals when there are high probability trade situations that should be exploited. Candlestick analysis also provides a visual analytical tool that shows when the probabilities of having money exposed to the market may not be beneficial. As demonstrated in the market uptrend over the past three weeks, although it has been slow and steady, the market indexes have been trading in an indecisive fashion. This could be due to the anticipation of political gridlock in Washington. The markets are very aware of the fact that when Washington cannot get anything done, that allows the US economy to move in the manner it should without government interference.

Both the Dow and the NASDAQ have traded relatively indecisively over the past two weeks, the Dow essentially moving sideways. Investors are less aggressive in establishing positions if they do not know what the political environment will be after the election. Obviously, if the Republicans take over a good number of seats in the House and the Senate, this will make it much more difficult for the White House to get its agenda through. Fortunately, the more time and effort that our politicians require to fight each other, the less time they have available for figuring out ways to diminish the growth of American business.

Just as in holding positions through earnings, the same evaluation holds true for analyzing a market trend through an important election. The slow uptrend over the past few months being finalized with relatively indecisive trading, going into election time, creates a chart scenario. When the evaluation of that chart scenario does not provide a clear picture, lower your exposure to market conditions. Remember the first sentence. The purpose for finding a trading program that works successfully is to constantly put the probabilities in your favor. If the analysis of the market indexes does not reveal what investor sentiment is doing, move your money to cash. The results of the election will indicate what investor sentiment is going to do.

Chat session tonight at 8 PM ET.

Good Investing,

The Candlestick Forum Team


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